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Bumble’s share price just fell below $40. Should I buy the stock now?

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Shares in dating app company Bumble (NASDAQ: BMBL) took a big hit yesterday. When the US market closed, the stock was down 19% at $38.56 – below the company’s Initial Public Offering (IPO)  price of $43.

So why did Bumble’s share price plummet yesterday? And has the fall created a buying opportunity for me?

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Why Bumble’s share price just tanked

The huge share price fall here was the result of the company’s third-quarter 2021 earnings report, which was a little disappointing overall.

Bu there were plenty of positives too. For example, total revenue for the period was up 24% year-on-year to $201m with Bumble app revenue up 39%. Meanwhile, total average revenue per paying user (ARPPU) increased to $22.97, compared to $19.38 a year earlier. Additionally, the group raised its guidance for the full 2021 year. It now expects total revenue of $765m-$768m for the year.

However, the market didn’t like the fact that Badoo app and other revenue fell 3% to $58m. Last quarter (Q2), revenue here was up 11%. It also didn’t like the fact that total paying users came in at 2.87m, down from 2.93m at the end of June.

As a result of these latter issues, a number of brokers cut their share price targets for the stock. One such broker was RBC, which cut its target price to $55 from $65.

Should I buy Bumble stock now?

When I covered Bumble earlier in the year after the IPO, one concern I had was the stock’s valuation. At the time, the market-cap was around $13bn and the price-to-sales ratio was around 18. Both seemed a little high to me.

After the recent share price fall, the valuation is now far more reasonable. Today, the market-cap is $7.4bn and the forward-looking price-to-sales ratio is about 9.7 using the midpoint of 2021 revenue guidance. Those figures aren’t that high, in my view, given the company’s growth.

One issue for me however is that the company is not consistently profitable yet. In the first quarter of 2021, the group posted net earnings of $323m. However, in Q2 and Q3, it posted net losses of $11.1m and $10.7m respectively. This adds risk to the investment case. I’d like to see the group deliver consistent profits. It’s worth noting that rival Match Group has been posting big profits for years.

Another concern is competition. In this industry there are very low ‘switching costs’, meaning that users can easily jump between apps. There are also low barriers to entry, meaning that start-ups can easily launch new products and capture market share. The jury is still out as to whether Bumble has a genuine competitive advantage, in my opinion.

Given these issues, I’m going to keep Bumble shares on my watchlist for now. There are certainly things to like about the company. However, I think there are better growth stocks to buy right now.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Match Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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